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    Retirement Method and Replacement Method

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    Queenie Valle
    The retirement method records depreciation when an asset is retired by deducting the salvage value from the original cost. The replacement method records depreciation when an asset is both retired and replaced by deducting the salvage value from the replacement cost. This is illustrated with an example of accounting for tools using both the retirement method and replacement method of depreciation.

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    Retirement Method and Replacement Method

    Uploaded by

    Queenie Valle
    352 views1 page
    The retirement method records depreciation when an asset is retired by deducting the salvage value from the original cost. The replacement method records depreciation when an asset is both retired and replaced by deducting the salvage value from the replacement cost. This is illustrated with an example of accounting for tools using both the retirement method and replacement method of depreciation.

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    The retirement method records depreciation when an asset is retired by deducting the salvage value from the original cost. The replacement method records depreciation when an asset is both retired and replaced by deducting the salvage value from the replacement cost. This is illustrated with an example of accounting for tools using both the retirement method and replacement method of depreciation.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    352 views1 page

    Retirement Method and Replacement Method

    Uploaded by

    Queenie Valle
    The retirement method records depreciation when an asset is retired by deducting the salvage value from the original cost. The replacement method records depreciation when an asset is both retired and replaced by deducting the salvage value from the replacement cost. This is illustrated with an example of accounting for tools using both the retirement method and replacement method of depreciation.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    Retirement Method and Replacement method

    Under retirement method of depreciation, no depreciation is recorded until the asset is


    retired. The amount of depreciation is equal to the original cost of the asset retired
    minus salvage proceeds.

    Under replacement method of depreciation, no depreciation is recorded until the asset is


    retired and replaced. The amount of depreciation is equal to the replacement cost of the
    asset retired, minus salvage proceeds.

    Illustration
    The following data relate to the tools account for the current year.

    Balance- January 1, 1,000 units at P50 per unit 50,000


    Acquisition – 2,500 units at P70 per unit 175,000
    Retirement tools- 1,200
    Proceeds from retirement of tools 5,000

    Necessary entries are as follows: Retirement method


    1. To record the acquisition:

    Tools 175,000
    Cash 175,000

    2. To record the retirement:

    Cash 5,000
    Depreciation 59,000
    Tools64,000

    Cost of tools retired (FIFO)


    1,000 units x 50 50,000
    200 units x 70 14,000
    1,200 64,000

    Necessary entries are as follows: Replacement method


    1. To record the acquisition in excess of the retirement (2,500 – 1,200 = 1,300)

    Tools (1,300 x 70) 91,000


    Cash 91,000

    2. To record the replacement of the tools retired:

    Depreciation 79,000
    Cash 79,000

    Replacement cost of tools retired (1,200 x 70 ) 84,000


    Proceeds from retirement (5,000)
    Depreciation 79,000

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